C’mon, Let’s Soak the Rich!
In the couple of weeks before the Legislature’s “First Decking” deadline, legislators were hearing tax-related bills, not only the “Enola Gay” bill we discussed last week. Different tax increase bills of all stripes were being considered. The testimony in response to those bills, interestingly, contained relatively few lamentations from a beleaguered public weary of tax increases. Rather, many testifiers were in support. There were those who sought to punish those who were surviving – a kind of crabs-in-the-bucket argument. “It makes sense to ask those who are fortunate enough to be doing well in this economy to pay more,” one testifier said, “in order to close the deficit without slashing the critical government services that so many struggling working families have come to rely on.” Ah, so struggling working families have an entitlement? “It is time for Hawai’i to tax the rich,” another said. As if our government doesn’t do that already. Other testifiers phrased it in terms of a moral imperative. “These changes are needed to ensure that the wealthy pay their fair share,” said one. “By asking the wealthy and profitable corporations to pay their fair share in taxes, we can prevent cuts to essential services and protect our communities,” exhorted another. Another went into more detail, saying that the tax increases were directed at “higher earning individuals and companies, many of whom have experienced no job loss and even profited over the past year with stock market gains and Hawaiʻi’s surging real estate prices. The wealthy and corporations also got significant tax breaks at the federal level in 2017, and can afford to share more in state-level taxes.” Whether a particular taxpayer was wealthy or a corporation seemed to be enough to trigger the testifier’s ire, even though that taxpayer may have had overall losses for the year like many of us have had, may or may not have taken advantage of the so-called 2017 tax breaks, and might not have had any real estate or stock market gains to speak of. This kind of argument results when generalizations are layered on top of other generalizations. Its connection with reality fades with each additional layer. Instead, consider this, proponents of tax hikes. Suppose your tax hikes snag a rich person. Do you seriously think that this person will just stand there and take the hit? Here are some of the things that such a person can do. If the person is rich because he or she runs or has influence over a business, the prices of goods or services that business offers can be expected to rise. This is especially true if lots of people in similar industries are affected by the hike. If, for example, doctors are asked to cough up tens of thousands more per head in taxes, it won’t be long before the price of health care in Hawaii goes up. That bite will then be felt by much more than just the person the tax hikes are aimed at. If the person is sufficiently fed up with, or otherwise can’t handle, the tax climate in Hawaii, he or she can get on a plane. A business can close its local branches. Our declining population numbers over the last several years and the increasing number of business closures tell us that this is not just theory. So, what happens when the cost of government is the same or greater but the number of persons paying that cost drops? The cost of government increases for those of us who are left. In any event, taxing the “rich” can’t be viewed in isolation. Taking lots of money out of the economy through the tax system will have a ripple effect that will be felt by everyone. It’d be like shooting yourself in the foot. So, the next time you hear the argument, “Soak the rich!” ask yourself if this really is the path we want to tread.
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The Enola Gay Has Left the Hangar
By Tom Yamachika, President What we have been seeing at the Legislature in terms of bills proposing new taxes has been relatively tame. Until now, that is. Senate Bill 56, with the ominous title “Relating to Revenue Generation,” has been granted its first hearing by the Senate Ways and Means Committee. It has officially started its journey through the legislative gauntlet. Why do I call this bill the Enola Gay? You might remember from the history books that Enola Gay was the name of the aircraft that dropped the first atomic bomb on the City of Hiroshima in World War II. Here, of course, the bill’s destination isn’t Japan; it’s the pocketbooks of us the taxpayers. Here’s what the payload contains. There is an income tax hike. The top income tax rate in the bill is 13% for single filers with more than $250,000 in taxable income, or for couples with more than $500,000 taxable income. The previous top tax rate was 11%. The top tax rate on capital gains is hoisted to 11% from 7.25%. The new tax brackets also are designed to get rid of the effects of low tax brackets on higher income taxpayers. Corporations, which used to be subject to tax rates of 4.4% to 6.4%, are taxed at a flat rate of 9.6%. Next, we go to general excise and use tax. The bill suspends, for two years beginning July 1, 2021, twenty different exemptions that are now allowed under the GET Law and six different exemptions that are now allowed under the Use Tax Law. This hearkens back to the same exemption suspension that was in effect exactly ten years prior to suspension period now proposed. And, finally, we have conveyance tax. The tax rate stays the same for properties sold for $1 million and under but is doubled for those selling for more. And if the property is a condominium or single-family residence for which the purchaser is ineligible for a county homeowner’s exemption, the tax is increased further; for such properties with a value of $10 million or more, the tax goes from 1% to 2.5%. The proposed suspension of exemptions lasts two years. All of the other rate increases proposed are permanent. The preamble to the bill trying to justify the increases says that we are in a pandemic and state government needs ” to generate revenue to allow the State to meet its strategic goals, avoid furloughs and layoffs for state workers, and prevent disruptions to essential government services.” Pandemics don’t last forever, however. These tax increases do. Another passage in the bill’s preamble recites that “the university of Hawaii economic research organization has found that every $1 in state salary reductions results in a $1.50 decrease in overall economic activity.” And what then happens with all the jobs outside of the public sector that are rapidly disappearing because businesses big and small can’t make ends meet? Are those simply ignored in thinking about economic activity? And I repeat, in the private sector we are not simply talking about salary reductions and furloughs. Those are happening too, but we are seeing layoffs and business closures. Lawmakers, are you going to let this Enola Gay drop the bomb on an economy already reeling from the pandemic? And taxpayers, if you have opinions on the subject that you want your lawmakers to know about, now may be a very good time to let your voices be heard. More Taxes for Movies and TV
By Tom Yamachika, President We have been railing for some weeks now about the goings-on at our Legislature. This week we spotlight the Department of Taxation. On February 16th, the Department published a Tax Information Release, a public statement of interpretation of the law, relating to the TV and movie production industry. To understand that release, we need to go into a little background first. When we see Hawaii’s General Excise Tax or GET, it is usually on a sales receipt and the tax shown is 4.712% or 4.166%, depending on the island you are on. That rate is driven by what we call the retail tax rate, which is applied to sales from a seller to an end user. The GET also is applied to intermediate stage products and services, namely those that are sold not to an end user but to a retailer, or someone further up the production chain. For example, consider a farmer selling vegetables to a market, or a fashion designer selling artwork to a manufacturer who will be making aloha shirts with that artwork. There, the GET is imposed at the “wholesale rate” of 0.5% instead. When movie and TV productions are made, not all of the people participating in the production are on the payroll. A few, such as principal cast, the director, and others in key roles like the director of photography, are independent contractors to the production. Many of them have entities they own, known as “loan-out entities,” which then contract out to the production. What, then, is the GET rate that applies when a loan-out entity is paid by the production company? In 2008, the Department of Taxation published proposed rules containing several key GET interpretations. In Proposed Admin. Rule sections 18-237-13-01.01(b) and 18-237-13(6)-10(b), which appeared in Tax Information Release 2008-02, the Department said that a production company is in the business of manufacturing, and a loan-out entity providing services to the production company qualified for the 0.5% wholesale rate. The proposed rules were reproposed in modified form in Tax Information Release 2009-05, but in the same proposed rule sections the Department reaffirmed that the GET interpretations above were still good and could be relied upon by taxpayers. During the next ten years, the Department decided not to finalize these proposed rules, instead publishing revised temporary rules that only addressed the income tax credit for productions and did not include any GET rules. After finalizing the rules, the Department published an Announcement in November 2019 ostensibly to summarize the rules that were adopted, but it added a note, seemingly out of right field, saying that a “production company is not considered to be in the business of ‘manufacturing’ [for GET purposes].” Tax Information Release 2021-01, the interpretation published on February 16, explains that “the Department reviewed its position on deeming a motion picture or television film production company to be engaged in the business of manufacturing. Through this review, the Department determined that this prior position was inappropriate.” In other words, the Department changed its mind, and loan-out entities are now taxable at the full retail GET rate. Neither the Release nor the prior announcement showed any reasoning from the applicable law (which did not change in the meantime) even attempting to justify the Department’s about-face. “I am altering the deal,” the Department is effectively saying. “Pray I don’t alter it any further.” Folks, this is Hawaii, not “The Empire Strikes Back.” The Department is given authority to make published pronouncements and adopt rules so people know and can plan business activities that follow the law. If the law changes because of legislative action or a court decision, that’s one thing. Or if the Department made a mistake in coming to its earlier ruling and can explain what the mistake was and why it was wrong, maybe that is okay as well. But changing the rules in midstream just because someone feels like it sends the message that the Department can act arbitrarily. We need our government to keep its word, give adequate notice of any material changes, and rein in any Vaderesque action. |
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